25 Nov Bankruptcy Exemptions: The Injuries of Benn (Part IV)

Getting compensated for injuries is personal. It’s meant to replace a loss to you as a person. Missouri exemption law recognizes that. Yet the recent evolution of those exemptions in bankruptcy (here, here, and here) has set up an unusual conflict between state and federal law.

Until the Benn decision discussed previously, Missouri cases were uniform in saying that Missouri law protected an unliquidated personal injury claim from creditors — and from bankruptcy trustees.

In the modern era, the cases trace back to Judge Barry Schermer’s In re Mitchell decision in 1987. Mitchell reasoned that the state never allowed trafficking in the injury claims of individuals under its common law. And by implication, the “opt out” law (noted in part I of this series) incorporated the common law of Missouri into the arsenal of bankruptcy exemptions.

But in the Mahony case, Judge Arthur Federman found this long history was not sufficient to withstand the implications of the 8th Circuit’s Benn. He reasoned that Benn commanded that a separate legislative act — a statute — was required for the state to provide a protection of any asset in bankruptcy. So the common law — being created by the decision of a judge — was not enough to qualify.

Mahony is remarkable since most personal injury claims are common law (e.g. auto accidents are based on negligence) “created” by judges. So while Missouri judges can create a cause of action, under Mahony the protection of that personal compensation from creditors afforded by those judges throughout our history turns out to be irrelevant, if you file bankruptcy.

Ironically of course Western legal tradition holds that decisions of judges carry the force of law — unless the legislature itself acts to abrogate or reverse the decisions of the judges. And this is true for Missouri as well.

One can search in vain through the Bankruptcy Code to find the authority for federal courts to dictate to state lawmakers what is a “law.” Section 522 allows states to “opt out” of federal exemptions and enact their own but it does not tell the states how to do so. Such requirements appear to be grafted into the Code. Not by Congress but by federal… common law.

Despite all the fallout, common law exemptions or “magic words” of enactment were not at the heart of the Benn decision. These elements appear more speculative than decisive — as witnessed by Benn‘s dictum apparently striking down of the state wildcard exemptions — including the idea that the legislature “might” have intended to create two different exemption schemes for debtors in or outside bankruptcy proceedings. As lawyers say, it’s more dicta than holding.

Recently the Missouri state court of appeals was given the opportunity to express its opinion on the subject. In Russell v. Healthmont of Missouri, a debtor asked the state court to declare his right to exempt a PI claim when he filed bankruptcy. The court reiterated some of the cases finding we have always protected such claims and then confronted the Benn and Mahony decisions. It pointed out, “Of course, federal cases interpreting Missouri law are not binding on this court interpreting our own statute.” (internal quotes omitted) The Russell panel went on to hold:

Under Missouri law, an unliquidated, personal injury claim can, if the proper procedures are followed and conditions satisfied, be exempted from his bankruptcy estate pursuant to Sec. 513.427 [the opt out law]. the trial court erred in relying upon federal cases interpreting a Missouri statute in a manner contrary to that of established Missouri case law…(slip opinion p. 6)

So eventually it will have to come to this. It seems clear that state courts, interpreting their own law, do not believe a specific legislative act, much less any “magic words,” are needed to create an exemption for Missourians in bankruptcy. And they seem to believe that “common law” is still “the law of the state of Missouri” and can qualify as an exemption.

But state judges do not rule in federal court buildings. So will federal courts graft onto Sec. 522 a narrow linguistic and enactment standard that has not heretofore been found in it, particularly when it restricts the ability of states to craft their own exemption rules for their bankruptcy debtors? Or will they find a more balanced approach that sustains the core (reasonable) holding of Benn while restoring the authority of Missouri courts to define what Missouri law is? Time will tell.

I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors.
For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy.
If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400.
Our website: STLBankruptcy.com